The Protective Put

Written by OptionsANIMAL on . Posted in Instructors Blog

Should I stay or should I go now?!?!?!!! This is a title to a favorite song of mine from the 80’s.

 The Protective PutThe group was called The Clash. If you ask me, that really describes the market today. An international mix of economic reports with headline news that moves our market hundreds of points at a time! It also happens to have some lyrics that represent todays’ market.   “IF I go there will be trouble and if I stay there will be double”.  How do you trade this type of market with the ECB announcement, the F.O.M.C. announcement, and  the average work week coming up with the non-farm payroll numbers this week.  There is huge upside potential in the market but don’t forget to look at the huge downside risk.

My answer is simple for those who understand the power of option trading.  Buy insurance on the stock!!!  Use a simple strategy called the Protective Put taught in the OptionsANIMAL trading system. A put or put option is a contract between two parties to exchange an asset (the underlying), at a specified price (the strike), by a predetermined date (the expiry or maturity). One party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller of the put, has the obligation to buy the asset at the strike price if the buyer exercises the option.

In plain English, buy your stock and buy the right to sell your stock at a certain price for a certain amount of time.  The net debit for the trade is higher than just buying the stock.  You have the stock price and the debit price of the long put.  The risk is much lower than just having stock sitting in your portfolio.  The option acts as insurance on the stock and allows you to sell your stock at a higher price if it comes tumbling down.  Diversification can definitely help a portfolio, but if the market can move down I want long put protection.  Remember the golden rule of trading: Sell high and buy low.  If you chose to you could sell the stock thru the use of your option and use the money to buy back in at a lower price?  Maybe the option makes up some of the down side movement?  Maybe the option gives you the peace of mind or comfort to stay in todays’ market?  The last thing we can afford to do is miss the opportunity to make some money in today’s market.  Should I stay or should I go?  I choose to stay with my protective put strategy!

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